Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.

: BB21110191 Section: 2

TAKE-HOME ESSAY 2 - BT10203 MICROECONOMICS I (20%)

Instruction – Please answer all the questions with your own words or fill in the blanks. Please
show your work.

Question 1

Refer to the Figure 1 below to answer the questions.

RM

(Microwave Oven)
Figure 1 – Harmony Firm

1.1) If two microwave ovens are produced, Harmony Firm's total variable costs are
___________. (1M)
1.2) Harmony Firm's average fixed costs of producing three units of output are ___________.
(1M)
1.3) The marginal cost of the third microwave oven is ________________. (1M)
1.4) If six microwave ovens are produced, Harmony Firm's total fixed costs are __________.
(1M)
1.5) If six microwave ovens are produced, Harmony Firm's average total costs are
__________. (1M)

ANSWER For Question 1:

1.1) Harmony firm's total variable cost are,

(450-300)= $150

In the above figure the fixed cost is $300 when output level is zero.

1.2) Average fixed cost = TFC/Q

AFC of producing three units of output is 300/3= $100

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

1.3) Marginal cost is calculated by change in total cost ÷ change in output level

MC of the third microwave is total cost of 3 unit - total cost of 2 unit = 500-450= $50

1.4) Harmony firm's total fixed cost at six unit are $300 because fixed cost is fixed at any
unit of output.

1.5) Average total cost = total cost/output level

Harmony firm's average total cost are = 600/6= $100

(5 Marks)

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

Question 2

Refer to the Table 2 below to answer the questions.

Table 2 – Fantasy Firm

Number of
Fruit TFC TVC TC MC
Baskets
0 RM100 RM0 RM100 --
1 100 20 120 20
2 100 30 130 10
3 100 42 142 12
4 100 62 162 20
5 100 92 192 30
6 100 136 236 44

2.1) Assume that Fantasy Firm sells fruit baskets in a perfectly competitive market. The
market price of a fruit basket is RM44. To maximize profits, Fantasy Firm should sell
________ fruit basket(s) and their profit is ________. (2M)

2.2) Assume that Fantasy Firm sells fruit baskets in a perfectly competitive market. The
market price of a fruit basket is RM30. To maximize profits, Fantasy Firm should sell
________ fruit basket(s) and their profit is ________.(2M)

2.3) Explain the above answers (2.1 and 2.2), according to the decision making by firm in
the short run and long run. (1M)
___________________________________________________________________________
___________________________________________________________________________

ANSWER For Question 2:

2.1) 6, RM28

Under perfect competitive market profit maximizing output is P=MC

If price is 44 then as the condition is price will be equal to marginal cost, so profit
maximizing output is 6 fruits basket.

Profit will be (Q x P) - TC
(44 x 6) - 236 = RM28

2.2) 5, -RM42

If price is 30 then profit maximizing output will be 5 unit

Profit will be,

(30 x 5) - 192 = -42

Firm should not sell any because firm earning negative price of -42

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

2.3) In case 2.1 firm will continue its production because it is experiencing profit. In 2.2 case
firm earn negative price at profit maximizing point but they can stay in business because
there Total Revenue at 5 unit is (5×30) = RM150 and this is the more than total variable
cost.

(5 Marks)

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

Question 3

Explain why monopoly is one of the sources of market failures. Illustrate your explanation by
showing graph(s).

ANSWER For Question 3:

Market failure, occurs when the free market doesn't work efficiently and when there is a
state of disequilibrium in the market due to "Market distortion". It takes place when quantity
of goods and services supplied is not equal to the quantity of goods and services demanded.

Monopoly is the part of imperfect competition markets which result in market failure because
of two reasons which are output is less than socially efficient, leading to deadweight loss (or
loss of social welfare) and there is allocative inefficiency.

Firm in the Monopoly market produce products with marginal revenue equal to marginal cost,
as opposed to perfect competitive firm with prices equal to marginal cost. As a result,
production is not efficient. This leads to a loss of welfare, as consumers who are willing to
pay more than the marginal cost cannot procure goods and services, resulting in a loss of
social welfare. Inefficient output generation also leads to inefficient allocation. Therefore, the
quantity of goods and services in demand does not match the quantity supplied, resulting in
market failure.

That is clearly understand by following diagram:

In the graph as we see that there is deadweight loss resulting from monopoly market
conditions. Socially optimal output is Qc = 200, but monopoly market produces where MR =
MC. So, Qm = 100, which is sold at a high price of 75, instead of socially optimal price 35.
This less than efficient output results in deadweight loss of ½*(75-35)*(200-100) = 2000

(10 Marks)

TOTAL 20 MARKS

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

TAKE-HOME ESSAY 3 - BT10203 MICROECONOMICS I (20%)

Instruction – Please answer all the questions by showing working calculation.

Question 1

Refer to the Table 1 below to answer the questions.

Table 1 – Firm A
q TFC TVC TC MC AVC ATC
0 RM100 RM0 RM100 -- -- --
1 100 40 140 40 40 140
2 100 60 160 20 30 80
3 100 90 190 30 30 63.33
4 100 124 224 34 31 56
5 100 180 280 56 36 56
6 100 264 364 84 44 60.67
7 100 372 472 108 53.14 67.43

1.1) If the market price is RM20, then this firm will maximize profits by producing ________
units of output. (1M)
1.2) If the market price is RM84, then this firm will maximize profits by producing ________
unit(s) of output and its profits will be ________. (2M)
1.3) If the market price is RM34, then in the long run the firm will _________________. (1M)
1.4) The shutdown point price for this firm is _____________________. (1M)

ANSWER For Question 1:

1.1) If market price is RM 20 , then, for equilibrium,

P=MC=20 at a level where q = 2.
Thus, this firm will maximize profits by producing 2 units of output.

1.2) If market price is RM 84 , then, for equilibrium,

P=MC=84 at a level where q = 6.
Thus, this firm will maximize profits by producing 6 units of output.

Profit = Total revenue - Total cost

= (P*Q)-(TC)
= (84*6)-364
= RM 140

1.3) If market price is RM 34, then, for equilibrium,

P=MC=34 at a level where q = 4.
In the long run, the firm will continue its production.

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

1.4) The shut down point price for this firm is the minimum value of the average variable
cost that is RM 30. Below this price, the firm will exit the market.

q = 2 units
q = 6 units and profit = RM140
The firm will continue its production.
Shutdown price = RM30

(5 Marks)

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

Question 2

Refer to the Table 2 below to answer the questions.

Table 2 – Monopoly Firm

Price (RM) Quantity
20.00 1
18.00 2
16.00 3
14.00 4
12.00 5
10.00 6
8.00 7

2.1) Illustrate the above table in a graph. (1M)

2.2) If a monopoly faces the demand schedule given in the table and has a constant
marginal and average cost of RM4 per unit of providing the product, then the monopoly
maximizes its profits by charging ________ per unit and selling ________ units of output.
(2M)
2.3) If a monopoly faces the demand schedule given in the table and has a constant
marginal and average cost of RM12 per unit of providing the product, then the monopoly
maximizes its profits by charging ________ per unit and selling ________ units of output.
(2M)

ANSWER For Question 2:

2.1)

2.2) Monopoly will produce quantity where marginal revenue is equal to marginal cost. At
marginal cost RM4, it will be equal to marginal revenue at output 5. The price charged will
be RM12. The price per unit would be RM12 and 5 units of output.

2.3) At marginal cost 12, it will be equal to marginal revenue at quantity 3. Price charged will
be demand curve at quantity 3, which is price RM16. Thus price per unit would be RM16,
and 3 units of output.

(5 Marks)

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

Question 3

Refer to the Figure 3 below to answer the questions.

RM

Figure 3 – MY Shop

3.1) Assume MY Shop has fixed costs of RM150 and is a monopolistically competitive firm.
To maximize profits in the short run, this firm should produce ________ personalized
sweatshirts. (1M)
3.2) Assume MY Shop has fixed costs of RM150 and is a monopolistically competitive firm.
To maximize profits in the short run, this firm should set a price of __________. (1M)
3.3) Assume MY Shop has fixed costs of RM150 and is a monopolistically competitive firm. If
this firm is producing the profit-maximizing level of output and selling it at the profit-
maximizing price, the firm's profit is ______________. (1M)
3.4) If MY Shop is monopolistically competitive, what is the minimum level of fixed cost that
would lead to the firm continuing to operate in the short run? ________________________.
(1M)
3.5) If MY Shop is monopolistically competitive, what is the maximum level of average
variable cost that would lead to the firm continuing to operate at the profit-maximizing level
in the short run? _____________________. (1M)

ANSWER For Question 3:

3.1) This firm should produce produce 50 units where MR=MC

3.2) This firm should set a price of 18 per unit in a short run.

3.3) A firm cannot earn profit when it's ATC curve is upward from demand curve, so at that
time firm is incurring losses.

3.4) In short run, a firm have to bear fixed cost whatever the level of output and variable
cost change with change in output and a firm have to bear fixed cost of RM 150 .

3.5) The maximum level of average variable cost in which a firm can operate at profit
maximize level, is that where AVC equals to MC and after that point AVC fall below MC.

(5 Marks)

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Name: Nur Diyanah Binti Mohd Sofri @ Kenny Matric No.: BB21110191 Section: 2

Question 4

With no concern on the legality, if you are given a choice, which market structure (either
perfect competition or monopoly or oligopoly or monopolistic competition) that will you
choose? Explain the reason. Will your answer be different, if you are concern on ethical issue?
Explain.

ANSWER For Question 4:

I would choose monopolistic competition. This is because, in this market structure, there are
many firms but they produce slightly differentiated products. This means that what I'll have
to do is ensure that my products have the most unique features or more features compared
to those of my competitors and thus most consumers would go for it. This would increase
sales and with more demand, I would benefit from economies of scale when it comes to
production thus I would be assured of high profits.

My choice would change to perfect competition if there's an ethical issue as a concern. This
is because, with perfect competition, there's always perfect information, production costs are
almost the same all across and therefore in case the government places a policy, it'll cut
across and not just affect an individual and thus it's possible to set prices that'll be the same
for all the producers.

(5 Marks)

TOTAL 20 MARKS

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